4 Reasons To Sell Apple And 5 Possible Replacements

Includes: AAPL, BA, GE, GOOG, SLB, UPS
by: Alan Brochstein, CFA

Did everything just line up for an interim peak for Apple (NASDAQ:AAPL)? On the Ides of March, the stock ran to an all-time high as a speculative frenzy, as measured by options volume and stock volume, continues to press the stock to significantly overbought levels.

Playing the "Pick the Top" game on AAPL may be almost as popular as betting on the NCAA basketball tournament and a lot more interesting to me. I have to admit to being a bit surprised, as I had expected it to be contained to the 550 level, but what's $50 billion between friends?

Even if the $600 print on 3/15 wasn't the top, and it quite possibly was, there are some dynamics that suggest to me that it could spend some time back at $500-550 . Here are my reasons:

  • It hit a nice big round number - this could be a psychological resistance level that induces profit-taking (glad I didn't write this article when it was $500 just weeks ago).
  • This action coincides with quadruple-witch options expiration.
  • The stock is significantly overbought - I use an indicator developed by StockVal, and it hit 1.87 on a weekly level at 600 (analogous to 2 s.d.).
  • Big Money will likely be rebalancing in the next two weeks as quarter-end approaches, with the stock up almost 50% this quarter.

My best guess is that AAPL selling will be positive for the market, as rebalancing institutional investors move into other stocks. While it is likely that a lot of this will feed into other Tech names, it's possible that large stocks outside of Technology could benefit too. The institutional holders most likely have a growth bias, so the ballpark of possible beneficiaries is likely Large-Cap Growth.

Trying to identify what might appeal to these large investors, I decided to screen the R1000 index for stocks with market caps in excess of $50 billion (56) that are up less than 15% so far in 2012 (38). Here are some other parameters:

  • 2013 projected EPS growth > 12% (13)
  • 50dma/200dma < 10% (7)
  • PE relative to 5-year Average < 1X (6)

I ended up with six companies, but I decided to not include an Energy E&P company, as it didn't make a lot of sense to expect Apple sellers to do that trade. Here are the 5 that I think could see some lift in coming weeks as institutional investors rotate out of AAPL:

5 Alternatives to AAPL
(Click to enlarge)

The stocks I am suggesting might benefit are sorted by PE. Each of them is less overbought than the overall market and has advanced less than the S&P 500 so far in 2012 (through 3/14).

General Electric (NYSE:GE) is a hybrid Industrial and Financial, and it is actually lagging both sectors. Earnings are just a year off of their trough and are accelerating. The stock is the most extended of the five I am recommending, but it is also the most depressed from prior levels. Over the past year, it has lagged the overall market.

Google (NASDAQ:GOOG) is an obvious choice to me, given that it is in the same economic sector. Analysts expect 2013 EPS growth will be faster than Apple's, and the PE is only a slight premium. The EV/EBITDA valuation, which is looking backwards and, thus, not accounting for the stellar 2012 Apple should enjoy, favors GOOG. GOOG is the only stock on the list that is down in 2012, though it has rallied nicely since it tanked following the Q4 earnings release and appear to be on track. Like many of these other stocks, it is near the high-end of its 5-year trading range.

Schlumberger (NYSE:SLB) is the only stock on the list that has declined over the past year. This stock looks the most iffy to me technically, but there appears to be support at 70. The valuation is near the low end of the past decade. I suspect that concerns over diminished gas drilling are weighing on the stock - clearly investors don't believe the 2013 EPS growth estimates of 22%.

United Parcel Service (NYSE:UPS) is the best performer over the past year, but up only slightly compared to the S&P 500. The stock just cleared its 5-year highs on a clear breakout, though the all-time high from late 2004 is still about 10 points away. We often hear about how margins at large Industrials are inflated and unsustainable, but that doesn't appear to be the case here.

Finally, Boeing (NYSE:BA) is enjoying not only the launch of its new 787 Dreamliner, but it is seeing strong demand for narrow-body models as well, especially in Asia. I guess investors can't be blamed for being a bit cautious on the name given all of the 787 delays, but it seems like they will have years of steady and strong growth.

AAPL has had a tremendous run. I have shared a few reasons why I believe that the stock may pause and potentially retrace a bit in the coming weeks. I didn't mention valuation, as it's not a reason. The stock is priced now like the market. It's not as cheap as it was, but it certainly isn't expensive if the 2012 projected earnings are met.

I expect that large institutional owners will be looking to rebalance their portfolios as they book profits. It's a bull market, and I don't think that they will park it in cash. The five potential beneficiaries I highlighted are all high-quality, Large-Cap names that have some characteristics of growth, value and price action that could attract the attention of big money managers as they consider their alternatives.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. GOOG is in the Top 20 Model Portfolio at Invest By Model

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